EDUARDO C. ROBRENO, District Judge.
Table of Contents
I. INTRODUCTION ............................................................ 539
II. BACKGROUND .............................................................. 540
III. STANDARD OF REVIEW ...................................................... 543
IV. DISCUSSION .............................................................. 549
A. Applicable Law ....................................................... 549
B. Analysis ............................................................. 545
1. Parties' Burdens .................................................. 545
2. Terms of Exclusion 3(a) ........................................... 545
3. Application of the Exclusion ...................................... 546
4. Lender's Objections to Applying the Exclusion ..................... 547
a. Lender's Knowledge ............................................. 547
b. Lender's Negligence ............................................ 548
c. Lack of a Specific Exclusion ................................... 549
5. Exclusion 3(a) Warrants Denying Coverage of the Defect ............ 549
V. CONCLUSION ............................................................ 550
The plaintiff in this action, Beneficial Mutual Savings Bank ("Lender"), is a lender. The defendant, Stewart Title Guaranty Company ("Insurer"), is a provider of title insurance. Lender loaned $480,000 (the "Loan") to 3010 Ocean Avenue Brigantine, LLC, (the "LLC"), and it was guaranteed by William D. Bucci (defined collectively with the LLC as "Borrowers"). The Loan secured by a mortgage (the "Mortgage") on real estate located at 3010 Ocean Avenue (the "Property").
Insurer issued Lender a title insurance policy (the "Policy") insuring the Mortgage as a first mortgage on the Property. The Policy provides defense and indemnification for, inter alia, lack of priority of the Mortgage over any other liens on the property. At the time the Property was conveyed to the LLC, there was a previous mortgage for the amount of $1,200,000 (the "Prior Mortgage") on the property securing a loan made by Bancorp Bank ("Prior Lender") to the owners of the property prior to the transfer to the LLC. That the Mortgage is subordinate to the Prior
The Policy included an exclusion which, inter alia, excluded coverage for any defects which Lender had "agreed" to. Thus, the question driving this litigation is whether Lender accepted the Mortgage subordinate to the Prior Mortgage, and thus agreed to the Defect. If Lender did agree to the Defect, coverage under the Policy is excluded. If Lender did not agree, it is entitled to defense and indemnification.
For the reasons set forth below, the Court will grant Insurer's Motion for Summary Judgment and deny Lender's Motion for Summary Judgment.
Lender is a chartered bank organized under the laws of Pennsylvania and with its principal place of business in Pennsylvania. Insurer is an insurance company organized under the laws of Texas and with its principal place of business in Texas.
On November 12, 2009, Lender loaned Borrower $480,000.00 in the form of a commercial mortgage loan. Pl.'s Mot. Summ. J., Pl.'s Statement Undisputed Facts ¶ 2. To secure the Loan, the LLC granted Lender a Mortgage which was duly recorded. Pl.'s Statement Undisputed Facts ¶ 3-4 (citing the Open-End Mortgage and Security Agreement ("Mortgage Agreement")). Mr. Bucci guaranteed the Loan personally. At the time the Loan was made, and the Mortgage given, the Prior Mortgage for $1,200,000, held by Prior Lender, remained unsatisfied.
According to the Loan Information Summary, the purpose of the Loan was "to refinance an existing second mortgage on Borrower[s]' investment property located at 3010 Ocean Avenue." Loan Information Summary 1. The Loan Information Summary lists the proposed collateral for the Loan as a title insured second mortgage and the assignment of rents, leases, and contracts from the Property. Loan Information Summary 2. The Property was appraised, at the time that the summary was prepared, at a value of $2,400,000, and thus, after accounting for the first and second mortgages, the equity remaining in the property was approximately $720,000. Loan Information Summary 5.
About a month prior to closing, Lender received a copy of a marked-up title commitment prepared by Insurer's title agent, Brendan Abstract ("Abstract Company"). The title commitment lists several out-standing mortgages on the Property. Each outstanding lien contained in the commitment was accompanied by a hand written notation, some barely legible, which Lender claims indicates that each mortgage would be removed prior to closing.
The Mortgage Agreement executed at the closing of the Loan states that, inter alia, "[e]xcept for a certain first Mortgage disclosed by Mortgagor to Mortgagee, Mortgagor warrants that it presently possesses an unencumbered fee simple title to
Most notably, the Loan Agreement, executed simultaneously with the other documents, states that the Loan was secured by
Loan Agreement 1.
Insurer issued the Policy (title insurance), insuring the Loan and Mortgage. Pl.'s Statement Undisputed Facts ¶ 5; see also Loan Policy Title Ins. The Policy provided coverage for fourteen numbered risks which included, inter alia, number 10 providing for coverage for "[t]he lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or encumbrance." Loan Policy Title Ins. 2.
The Policy also includes seven enumerated exclusions from coverage under which the "matters are expressly excluded from the coverage of this policy, and [Insurer] will not pay loss or damage, costs, attorneys' fees, or expenses that arise." Loan Policy Title Ins. 2. Exclusion 3(a), in particular, provides an exclusion for "Defects, liens, encumbrances, adverse claims, or other matters: (a) created suffered, assumed, or agreed to by the Insured Claimant." Loan Policy Title Ins. 2. Notably, there is not a specific exception included in the Policy which would expressly cover the Defect.
In February 2011, Lender filed a notice of claim ("First Notice") in which it first
Notice Claim 1-2. In response, Insurer conducted an investigation which revealed the numerous errors committed by all parties to the Policy and the Loan Agreement. Insurer closed the preliminary claim in September of 2012, denying coverage under the Policy.
On May 15, 2012, Prior Lender sought to foreclose on the Property by filing suit in the state court naming Borrowers and Lender as defendants. On June 22, 2012, Lender sent a second claim letter (the "Second Notice") to Insurer, seeking an immediate defense in the foreclosure action. On July 22, 2012, Lender filed an answer in the foreclosure action, contesting the foreclosure. On October 5, 2012, following communications among the parties and their agents, Insurer denied Lender's claim for defense and, if necessary, indemnification in the state court proceeding. See Denial of Claim Letter, October 5, 2012. In denying Lender's claim, Insurer pointed to and relied on Exclusion 3(a). See Denial of Claim Letter 5. The denial letter explained that
Denial of Claim Letter 6.
On November 6, 2012, Lender initiated the instant action. ECF No. 1. Following the conclusion of discovery, the parties filed cross motions for summary judgment. ECF Nos. 24, 25. Each party filed a response to the other's motion for summary judgment, and, in turn, each party filed reply briefs. ECF Nos. 26-29, 32, 33. The parties' motions are now ripe for disposition.
On June 17, 2014, the state court entered a final judgment in the foreclosure action, finding in favor of Prior Lender and issuing a writ of execution for the foreclosure.
Summary judgment is appropriate if there are no genuine disputes of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(a). "A motion for summary judgment will not be defeated by `the mere existence' of some disputed facts, but will be denied when there is a genuine issue of material fact." Am. Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 581 (3d Cir.2009) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). A fact is "material" if proof of its existence or non-existence might affect the outcome of the litigation, and a dispute is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S.Ct. 2505.
In undertaking this analysis, the court views the facts in the light most favorable to the non-moving party. "After making all reasonable inferences in the nonmoving party's favor, there is a genuine issue of material fact if a reasonable jury could find
The standard for addressing cross-motions for summary judgment remains the same as if there were only one motion filed. See Lawrence v. City of Phila., 527 F.3d 299, 310 (3d Cir.2008).
In a diversity case, when faced with a motion for summary judgment, the federal courts follow federal law on issues of procedure but apply the substantive rule of decision from state law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Garcia v. Plaza Oldsmobile Ltd., 421 F.3d 216, 219 (3d Cir.2005). The parties rely on New Jersey law in their written submissions to the Court, which indicates their agreement that New Jersey law governs. See, e.g., Mellon Bank v. Aetna Bus. Credit, Inc., 619 F.2d 1001, 1005 n. 1 (3d Cir.1980) (applying state law to case where parties rely on it and do not dispute its application).
The meaning of the term "agreed," as used in the Policy, is an issue of law. Whether Lender "agreed" to accept the Defect is an issue of fact. Insurer, as a proponent of the exclusion, bears the burden of proof.
As a general rule, "an insurance policy is interpreted according to its plain and ordinary meaning." Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 607 A.2d 1255, 1260 (1992) (citing Longobardi v. Chubb Ins. Co., 121 N.J. 530, 582 A.2d 1257 (1990)). "Like other policies of insurance, title policies are liberally construed against the insurer and in favor of the insured." Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 116 N.J. 517, 562 A.2d 208, 214 (1989) (citing Sandler v. New Jersey Realty Title Ins. Co., 36 N.J. 471, 178 A.2d 1, 5 (1962)). Despite that standard of liberal construction, "courts should not write for the insured a better policy of insurance than the one purchased." Id.
"[T]he duty to defend is generally determined by comparing the allegations in the complaint with the language of the policy. When the two correspond, the insurer must defend the suit." SL Indus., Inc. v. Am. Motorists Ins. Co., 128 N.J. 188, 607 A.2d 1266, 1271 (1992) (internal citation omitted). Under New Jersey law,
The initial burden is on the policy holder, Lender in this case, to establish that the claim for defense and, if necessary, indemnity, falls within the insurance agreement, here, the Policy. Once that burden is met, the burden shifts to the carrier, Insurer in this case, to establish that an exclusion or exception applies which would allow it to deny coverage, here Exclusion 3(a). "Policy exclusions must be narrowly construed[, and] the burden is on the insurer to bring the case within the exclusion." Charles Beseler Co. v. O'Gorman & Young, Inc., 188 N.J. 542, 911 A.2d 47, 49 (2006) (internal marks and citation omitted). An exclusion will be given full effect provided it is "specific, plain, clear, prominent, and not contrary to public policy." Doto v. Russo, 140 N.J. 544, 659 A.2d 1371, 1378 (1995).
In its initial denial, see Denial of Claim Letter 6, as well as in subsequent filings before the Court, Insurer does not dispute that the triggering event, the foreclosure on the Property by the Prior Mortgage as a senior mortgage, would fall within the coverage set forth in the enumerated risks, particularly 10 through 14, see Loan Policy Title Ins. 2. Furthermore, on the face of the Policy (absent the exclusions) risk 10 clearly provides coverage for the "lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or encumbrance," Loan Policy Title Ins. 2, which is the exact case here. Accordingly, Lender has satisfied its burden that the foreclosure of the Prior Mortgage falls within the Policy and, absent some applicable exception or exclusion, Insurer would be obligated both to "insure[] . . . against loss or damage . . . sustained," Policy Title Ins. 1, and "pay the costs, attorney's fees, and expenses incurred in defense of any matter" insured by the Policy, Policy Title Ins. 2.
The Court next considers if there is an applicable exception or exclusion. Insurer admits, in its denial of coverage and subsequent filings, that a specific "exception for the [Prior M]ortgage was not included in the Policy." Denial of Claim Letter 6. Instead, Insurer claims that Exclusion 3(a) operates to exclude the Prior Lender's foreclosure from coverage under the Policy.
Exclusion 3(a) excludes "[d]efects, liens, encumbrances, adverse claims, or other matters: (a) created, suffered, assumed, or agreed to by the Insured Claimant." Loan Policy Title Ins. 2.
New Jersey courts have not yet interpreted the terms "assumed" or "agreed to" in the context of this exclusion.
Id. at 784 (internal citations omitted). In the absence of any New Jersey or the Third Circuit authority providing a definition, the Court will rely upon the well accepted definition of "agreed" provided by the Sixth Circuit and used by other district courts in the Third Circuit. See Walsh Sec., Inc., 858 F.Supp.2d at 421-22; Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., No. 05-281, 2011 WL 611802, at *22 (E.D.Pa. Feb. 17, 2011), aff'd, 687 F.3d 620 (3d Cir.2012). The Court, therefore, construes the term "agreed" as carrying connotations of contracted and requiring full knowledge by the insured of the extent and amount of the claim against the insured's title. The Court reaches this definition in conformance with ordinary rules of contract interpretation and the oft used definition provided by the Sixth Circuit.
First, the Court must identify the exact defect at issue in this case to determine if Exclusion 3(a) applies. The Defect, as identified above, is that the mortgage securing Lender's loan of $480,000 occupies a secondary lien position to a $1,200,000 first mortgage. This defect, in the form of a senior lien, led to Lender's First Notice in February of 2011, Lender's Second Notice in June of 2012 upon foreclosure of the senior lien, and Lender's filing of the instant lawsuit seeking defense and indemnification in the foreclosure suit. Accordingly, the defect at issue in this case is that the Mortgage held by Lender was subordinate to the Prior Mortgage held by Prior Lender.
The Court will focus on whether Lender "agreed" to receive a second mortgage junior to an earlier mortgage on the property.
Furthermore, Kenneth Swedler,
Swedler Dep. 35:20-35:23. Based on the evidence, even when taken in the light most favorable to Lender, it is clear that Lender "agreed" to the Defect with "full knowledge" "of the extent and amount of the claim [(the Prior Mortgage)] against the insured's title." Am. Sav. & Loan Ass'n, 793 F.2d at 784.
The Court will next address Lender's three main objections to the applicability of Exclusion 3(a). Lender argues that (1) the policyholder must have full knowledge of the facts and the results those facts will bring about and that, as Lender lacked full knowledge, Exclusion 3(a) cannot apply; (2) New Jersey law requires that there was intentional, fraudulent, or deliberate conduct on the part of Lender for Insurer to prevail on the exclusion and that mere negligence will not suffice; and (3) New Jersey law requires a specific exception to exclude coverage of a prior lien.
Lender asserts that "it would have been impossible for [Lender] to have possessed the requisite level of knowledge and intent under New Jersey law, because it lacked knowledge of the full nature and origin of the [Prior Mortgage] at the time that [Lender] funded [the Loan]." Def.'s Resp. 2. First, Lender contends that it was not aware that, at the time it made the Loan, Borrowers were not the guarantors of the Prior Mortgage. Def.'s Resp. 11. Lender argues that it was unaware that the Loan transaction involved a transfer of the Property to Borrowers. Lender claims that, as a result of the simultaneous transfer, the Prior Mortgage was actually in default at the time of the Loan. To reach this conclusion, Lender relies heavily on the deposition testimony of Stephanie Digan.
Digan Dep. 249:11-250:4.
Even assuming that Lender was not aware of the ownership of the Property
Lender also relies heavily on Ms. Digan's testimony that she understood that the Prior Mortgage would be removed prior to the Loan. Pl.'s Resp. 19. This testimony is insufficient to create a genuine dispute of fact as to Lender's knowledge. Ms. Digan's testimony is contrary to all of the other evidence in the case including the Rule 30(b)(6) representative and the documentary evidence, all of which indicate that Lender intended to receive a second mortgage subordinate to a $1,200,000 mortgage.
Whether conflicting testimony is sufficient to raise a genuine issue is a question of federal law. A party does not create a genuine issue of material fact merely by pointing to testimony by one of its own witnesses which is contradictory with the testimony of its own 30(b)(6) deponent. Ms. Digan's testimony on this issue is in direct conflict with Lender's own 30(b)(6) deponent and the express terms of the Loan Agreement and the accompanying documentation, and Lender offers no explanation which would explain the difference in testimony. Accordingly, Ms. Digan's testimony does not raise a genuine dispute of fact.
Finally, Lender claims that because the reference to the first mortgage in the Loan Agreement was to a non-existent $1,200,000 mortgage held by First Cornerstone Bank rather than to the actual $1,200,000 loan held by Prior Lender, Lender could not have had the relevant knowledge required under New Jersey law. Assuming arguendo that Lender actually was mistaken as to whether it was First Cornerstone Bank or Prior Lender that held the Prior Mortgage, this lack of knowledge would not change the outcome. For Exclusion 3(a) to apply, Lender did not need to know every detail of the Defect. Instead, for Lender to have "agreed" to the Defect, Lender only needed "full knowledge . . . of the extent and amount of the claim." Am. Sav. & Loan Ass'n, 793 F.2d at 784 (cited by Pl.'s Resp. 14). Here, the full extent and amount of the claim was the existence of a senior mortgage in the amount of $1,200,000. Lender has not given any explanation as to why, even if Lender was mistaken, the mere difference as to the identity between First Cornerstone Bank and Prior Lender would be material.
Lender relies heavily on Keown for the proposition that, under New Jersey law, negligence on the part of the insured in creating a title defect is insufficient to satisfy the "created, suffered, assumed or agreed to" aspect of Exclusion 3(a). Pl.'s Resp. 18 (citing Keown v. W. Jersey Title
Keown, however, is not analogous to the present case. First, in the case at bar, Lender did not "create" the defect, rather Lender "agreed" to the Defect. Second, in Keown, the alleged defect, a potentially unmarketable title, arose purely through the negligence of the insured. In the present case, that the Prior Mortgage occupies a senior position to the Mortgage did not arise through Lender's negligence, but rather Lender intended that the Mortgage would occupy a subordinate position.
Lender cites to Amidano v. Donnelly, 260 N.J.Super. 148, 615 A.2d 654 (1992), for the proposition that Insurer's "fail[ure] to include a specific exception for the [Prior Mortgage] in the [Insurance] Policy" would require Insurer to insure the Prior Mortgage. Def.'s Resp. 7-8 (citing Amidano, 615 A.2d at 659). In Amidano, the insurer included several named exceptions for certain easements but neglected to include an exception for a certain easement allegedly known to the insurer. Amidano, 615 A.2d at 656-58. The court held that the "careful description of easements . . . excepted from coverage by reference to the recorded instruments creating them, justifie[d] a reasonable policyholder conclusion that title was insured against easements other than those specific easements, although subject to the exceptions for encumbrances in other named categories." Id. at 658.
Amidano not only fails to aid Lender's argument but also weakens it. First, the Policy in this case does not contain any specific exceptions for prior liens, making Amidano inapplicable as to Lender's argument on this point. Second, the Amidano court explicitly held that, in that situation, general exclusions, other than those for easements, would still be applicable as there were only specific exceptions for easements. Thus, Amidano stands directly for the proposition that, in the absence of specific exceptions, a general exclusion would apply.
The Court finds that the evidence of record, even when taken in the light most
For all the reasons set forth above, the Court finds that Lender "agreed" to the Defect as it agreed to take a position as a second mortgage, and Lender expected, and bargained for, coverage as a second mortgage, at least insofar as the Prior Mortgage was concerned. Accordingly, the Court will give Exclusion 3(a) its full effect as it is specific, plain, clear, prominent, and not contrary to public policy. See Doto, 659 A.2d at 1378.
For the reasons set forth above, Exclusion 3(a) applies to the Defect and Insurer does not have a duty to defend or indemnify Prior Lender's foreclosure action pursuant to the Prior Mortgage. Accordingly, the Court will grant Insurer's Motion for Summary Judgment and deny Lender's Motion for Summary Judgment.
The Clerk of Court is
The Court notes that the drafting error was committed by Ivan Willie, an "approved attorney" for Lender. At the time of drafting the loan documents, Mr. Willie's license to practice law was suspended. Mr. Willie is now disbarred for practicing law without a license, largely due to his various work for Lender.
